How Can I Finance My Project Without A Bank?
The UK economy is beginning to recover from the financial crisis, but banks remain cautious about lending. This can be very frustrating for entrepreneurial developers, who may spot a lucrative opportunity but struggle to meet the strict requirements of a conventional bank loan.
It’s not all bad news though, as a range of innovative new financing solutions are emerging in response. These alternative forms of funding are aimed at providing liquidity, and appreciate the value of calculated risk.
In this guide we’ll look at five key forms of alternative finance: equity crowdfunding, peer-to-peer funding, bridging and short term loans, remortgaging and mezzanine finance.
What is equity crowdfunding?
Crowdfunding is where finance is raised by asking lots of investors for a small amount of money, in return for a share in the business. It appeals to investors because having a small stock in many projects minimises risk, and it’s great for developers because the sky is the limit in terms of the amount you could potentially secure.
Crowdfunding is already popular in America, and is growing in the UK - last year it accounted for 18% of all commercial lending. It is gaining profile too, as tennis star Andy Murray has just spoken publicly about his investments through the Seedrs platform.
The House Crowd and Property Moose have brought the equity crowdfunding model to the housing market. In exchange for shares in the profits, investors’ money is used to acquire and renovate properties, which are then rented out and eventually sold.
There is a positive social element to these platforms too. They restore empty and derelict homes, and in some cases take on vulnerable tenants that other landlords might not touch.
Crowdfunding is flexible and reasonably quick – Seedrs reports an average of 27 days for a deal to fund.
However it does involve giving away a stake in your business, which may not be suitable for smaller projects. In addition, the property-focussed platforms mainly source and manage their own properties, which is not much use for independent developers.
Is peer-to-peer funding right for me?
Similar to equity crowdfunding, peer-to-peer (P2P) lending involves large numbers of investors clubbing together to lend, receiving interest from the borrower in return. It is another rapidly developing sector, with long-standing lender Zopa having recently reached £1billon worth of loans.
P2P lending is well on the way to becoming a major alternative to traditional bank loans. Regulation from the Financial Conduct Authority has added credibility and stability to the market, and the British government’s British Business Bank has invested £40million in small businesses through Funding Circle.
P2P borrowing is quick, with Funding Circle promising property finance in as little as two weeks; and there’s a positive sense of sharing and community to the process. However, the success and speed of your application relies upon you having a killer pitch that will attract investors’ attention. And depending on your platform and deal, interest rates on your loan may be high.
How do bridging loans and short-term finance work?
Bridging loans were traditionally used to fix a break in the property chain, such as freeing up capital to purchase a new property whilst your current one is in the process of being sold.
However the market has evolved and bridging loans are now used in many situations, such as purchasing an auction property, financing a property with a mortgage retention, and converting a property into flats. With terms of up to 18 months available, they are also a good option for developers.
Thanks to new mortgage rules introduced in April 2014, bridging lending grew by 24% last year, and annual gross lending reached a record £2.17billion. Some providers, such as ourselves, are authorised and regulated by the Financial Conduct Authority. This increases the industry’s credibility and our own, and enables us to fund self-build projects.
With turnaround times of days rather than weeks, bridging loans are one of the fastest options around. This is great if you need to act quickly on a dream project, or want to acquire properties at auction.
Short term finance is flexible too. You can choose to draw your funds in stages, so you only pay interest on the money you are using, or use retained interest so that you do not have to find the money on a monthly basis to pay the interest.
As with many other loan types, your finance is secured against a property or properties.
Should I remortgage?
Remortgaging or refinancing is where you take out a new mortgage on a property you already own. For developers this is usually in order to release capital to fund a development, improvements or new investments. Unlike our other options it does involve the bank, but you’re maximising returns on assets you already have.
This is a tried and tested source of funding, and may be more familiar than the other options we’re discussing. The UK base interest rate is still at a record low of 0.5%, so it’s a good time to take advantage of tempting new mortgage deals.
Remortgaging may be the option for you if your existing property has risen in value, and is likely to continue doing so. By switching to a competitive new offer you might end up with a cheaper mortgage too.
However moving mortgages will cost you in administrative fees, particularly if you have early repayment charges, and could lock you into another contract for a number of years. Judge the market wrongly and you could end up in negative equity.
Should I try mezzanine finance?
Mezzanine finance is often described as a compromise between equity and debt finance. On the one hand a standard lender might not be willing to take the risk your project represents, but on the other you may not be comfortable handing over a large portion of your equity to investors in exchange for funding.
This is where mezzanine finance comes in. The financer lends you money, which will be repaid with interest, but their risk is secured by them also taking a small stake in your company or project. Since the focus is on where you will be at the end of the term, there are often no monthly payments, allowing you to focus on development.
These deals can be good for fast-growing businesses looking to manage expansion or buyouts. But if things don’t go to plan, you may struggle with hefty payments. Because they fund where conventional banks won’t, you could also encounter high interest rates. Some mezzanine loans start at around the £10million mark so may not be suitable for many developers.
Where can I get more information?
Get a roundup of the key points in our handy flexible lending infographic.
If you still aren’t sure which alternative finance is best for you, get in touch with Affirmative. Authorised and regulated by the Financial Conduct Authority and a Member of The Council of Mortgage Lenders, our team of underwriters will give you information on competitive short-term funding options.